We use cookies to improve your experience on our website. By continuing you acknowledge cookies are being used.
Read (4 minutes)Owning your mortgage, not just your home
Wouldn’t it be great to live mortgage-free heading into retirement or even before you finish work? With interest rates at an all time low, shaving years off your mortgage could be more affordable than you think.
Aside from the obvious benefit – saving money on interest – getting ahead on your mortgage can give you some breathing space if life throws you a curveball or if interest rates go up (which is expected at some point). And if you like the idea of retiring earlier, focusing on paying down your mortgage could help you make it happen.
By taking one (or more) of these five steps you can make a big difference to bringing down the balance you owe on your mortgage.
1. Switching to fortnightly mortgage payments
If you’re making monthly mortgage payments, think about switching to fortnightly. It may seem trivial, but paying half your monthly payment every two weeks adds up to making one extra mortgage payment every year. That’s because there are 26 fortnights in a year, and only 12 months, so you will be making more payments in a 12-month period.
Let’s say your monthly mortgage payment is $2,000. Every year you’ll make 12 payments and pay $24,000 off your mortgage. By switching to fortnightly payments of $1,000, you’ll make 26 payments each year, totalling $26,000.
Some lenders won’t let you switch your payment frequency but it’s definitely worth asking – as long as you can afford the extra from your household budget.
2. Making the most of what’s on offer – offset and redraw accounts
Your mortgage may have come with an offset account or redraw facility. Both are designed to help you save on interest, but they work in different ways.
An offset account is a transaction account linked to your home loan. Like a regular bank account, you can use it for getting your salary and paying expenses. An offset account ‘offsets’ your home loan balance daily so that you only pay interest on the difference between the amount you owe and the balance in your offset account. In other words, the more you have in your offset account, the less interest you’ll pay on your home loan each day.
With a redraw facility, you can make extra payments into your home loan to reduce your principal loan amount and the interest you’ll pay on your loan as a result. Just like the name suggests, if you need to ‘re-draw’ any of the extra money you’ve paid, you can. It’s a good option if you find yourself with spare cash each month but don’t want to commit to higher mortgage payments. Some lenders will charge a fee each time you redraw money so always remember to check the fine print.
To give you an idea of which option might work best for you, take a look at this offset vs redraw facility table from Finder.
3. Upping your mortgage repayments
It could be a good time to increase your mortgage repayments when interest rates are low. This is especially true if you have leftover cash in the bank every month. The ‘How can I repay my loan home sooner?’ calculator from Moneysmart can give you a clear visual for how extra payments can lower the length and cost of your loan. Interest rates won’t stay at the same rate forever. Once they rise, see if you can challenge yourself and keep increasing your payments to stay ahead.
If the thought of taking years off your home loan is appealing but it feels like a stretch, discover some of the ways you can spend less and save more each month.
4. Make extra one-off payments when you can
From time to time, you may be lucky enough to find yourself with a lump sum of money. Maybe it’s an annual bonus from work, some money from family, a rebate from the ATO at tax time. Or, you may just have a quiet month and have some spare cash in the bank.
Instead of going on a spending spree, get into the habit of putting this money towards your mortgage instead. You’ll need to check with your lender that you can make extra payments and if you can’t it could be worth looking elsewhere for your home loan.
5. Shop around for a better deal
If it’s been a while since you’ve checked in on how competitive your mortgage is, make some time to run a comparison. Switching to another lender could save you money in interest – but be sure to do your homework first to make sure you won’t be paying a penalty or other fees if you do decide to switch –
- Fees for switching – lenders may charge a fee if you decide to leave your current loan, so it’s good to know upfront what this is. Your new lender could also charge you ‘establishment’ fees (also known as application fees) to set up your loan but they may also waive this fee to get your business
- Comparison rate – comparing the cost of home loans can be tricky, which is why every lender has to provide a loan ‘comparison rate’. This is a single figure that factors in the interest rate and most of the fees and costs associated with the loan. It means you can compare apples with apples when it comes to total loan costs.
- Loan features – are you able to make extra payments on your mortgage? Does the new loan offer you features to help you save on interest, such as an offset account or redraw facilities? And if so, are there any fees to withdraw money from these accounts? These are all important factors that could impact your loan costs in the long run.
Once you’ve found a more competitive home loan, it’s worth checking with your current lender to see whether they can match or beat it. Your lender will lose thousands of dollars in interest payments if you take your loan elsewhere, so they may be motivated to offer you a better deal.
Consider interest-only mortgages carefully
Interest-only mortgages can be useful. They can help first home buyers get on the ladder, and switching to interest-only payments for a time can help home owners deal with a short-term drop in their household income, for example. But going interest-only could do more harm than good in the long run, depending on your situation of course.
Interest-only mortgages should be carefully considered. When repayments only cover the interest component of your loan and nothing from the amount you’ve actually borrowed, your loan amount stays the same – which means it could be hanging around for much longer if you don’t catch up later on. Paying off the amount you’ve borrowed as well as interest could see you paying off your mortgage quicker – potentially saving you thousands of dollars in interest too.
Why paying off your mortgage faster might not always make sense
For the most part, paying off your mortgage quicker makes sound financial sense. But there are times where it may be wise to put extra money towards a different goal:
Paying off ‘bad’ debt first – some debts, such as a personal loan or credit cards, have a higher interest rate than others – in other words, they are more expensive to keep. And while your mortgage is providing you with a home and helping you build wealth in the long term, debts from credit cards and shorter term loans often only harm our finances.
Building up emergency savings – having emergency savings can make a big difference to your stress levels and get you out of a pickle if something unexpected comes up. A good rule of thumb is to have six months worth of income stashed for a rainy day. In the event of redundancy, unplanned home or car repairs, or injury or illness, for example, you’ll have a pot of money to fall back on.
Contributing to super – making sure you have enough money to live on in retirement is right up as one of the most important things you can do for your future self. Making extra super payments could make a big difference to your retirement savings – and save you on tax.
Working towards other goals – whenever you make any money decisions, it’s always important to keep the bigger picture in mind. You may have other goals, for example, that require you to save your money instead of paying it off your home loan. Starting a family or switching careers can be much easier if you have some extra money up your sleeve.
